REITs Valuation: Gearing
Gearing is the percentage of loans over total assets in the REITs' portfolio.
Gearing = Total debt รท Total assets
Unlike other listed companies, Singapore REITs are restricted by the regulatory framework. S-REITs can only borrow up to 45% of the total assets (different countries will have a different gearing threshold on REITs). There was a proposal that the MAS will review to increase the gearing ratio of REITs (more details here). The key risks of REITs are the availability of financing and the costs of borrowings.
Gearing is also a parameter that REITs investor can use to evaluate a REIT manager's risk behaviour. A high gearing ratio is an indicator that a REIT manager is willing to take on more debt and risk for growth. Our REITs strategy will not consider a REIT with gearing higher than 40%. This is to give a margin of safety on the REIT, as anything near 45% would also indicate that the REIT will have limited access to additional financing in the future.
A REIT investor who is considering Retail REIT with an overseas portfolio may find Sasseur REIT (SGX: CRPU) offers a lower risk as compared to Capita Retail China Trust (SGX: AU8U). Both REITs offer about the same yield, but Sasseur REIT has a gearing ratio of 28%, which is much lower than Capita Retail China Trust's gearing of 35%. While this doesn't mean that Capita Retail China Trust is a poorer investment, it just means that the REIT manager of Capita Retail China Trust is willing to take more risk than Sasseur REIT's manager.
A high gearing ratio is an indicator of potential capital funding through the right issues or private placement in the future. Investors should avoid any REIT that has high gearing to prevent any potential dilution.